Embryonic stem (ES) cells can differentiate into many specialized cell types, including those of the nervous system. We evaluated the differentiation of enhanced green fluorescent protein (EGFP)-expressing B5 mouse ES cells in vitro and in vivo after transplantation into the eyes of mice with hereditary retinal degeneration. After neural induction with retinoic acid, the majority of cells in embryoid bodies expressed markers for neural progenitors as well as for immature and mature neurons and glial cells. When induced ES cells were plated in vitro, further differentiation was observed and the majority of cells expressed β-III Tubulin, a marker for immature neurons. In addition, many plated cells expressed markers for mature neurons or glial cells. Four days after intravitreal transplantation into the eyes of rd1 mice (a model of rapid retinal degeneration), donor cells appeared attached to the vitreal surface of the retina. After 6 weeks in vivo, most transplanted cells remained adherent to the inner retinal surface, and some donor cells had integrated into the retina. Transplanted cells exhibited some properties typical of neurons, including extensive process outgrowth with numerous varicosities and expression of neuronal and synaptic markers. Therefore, after induction B5 ES cells can acquire the morphologies of neural cells and display markers for neuronal and glial cells in vitro and in vivo. Furthermore, when placed in the proper microenvironment ES-derived neural precursors can associate closely with or migrate into nervous tissue where differentiation appears to be determined by cues provided by the local environment, in this case the degenerating neural retina.